One of Australia's largest property groups, Mirvac, is synonymous with selling apartments but for the past 12 months, the developer has been exploring a different kind of housing product – building apartments and with a view to renting them.

The "build-to-rent" industry is thriving in the US and in Europe, but is non-existent in Australia although experts including Mirvac, say Australia is poised for the advent of such a sector, known overseas as the "multi-family" or "private rental" sector where institutional groups build masses of apartments to lease on a long-term basis, sometimes indefinitely.

"This is a great customer proposition, why don't we have it in Australia?" Mirvac chief executive Susan Lloyd-Hurwitz asks.

"Because the yield differential between residential property – pushed down by people looking for a capital growth – has been too big a stretch with retail and commercial property," she says, answering her own question. "But now with capitalisation rate compression, we are now very, very close to them being parallel."

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"And why do we think we have a chance to make institutional multi-family work? Because renting in Australia is generally a very miserable customer experience ... the whole industry is set up to serve the owner not the tenant."

In other words, the demand and supply of build-to-rent housing products are now at a confluence in Australia.

New generation to emerge

The US multi-family sector is the largest real estate class, bigger than commercial property and 25 per cent larger than the Australian real estate investment trust sector,
AP

A third of Australian households rent and more than 40 per cent of those have been in the rental market more than 10 years or more, says a recent survey by CHOICE, the National Association of Tenants' Organisations and National Shelter shows.

Those numbers are growing as home ownership has become more unaffordable – Sydney and Melbourne house prices have doubled since the global financial crisis in 2009, according to Corelogic – and because there is now a growing trend of people not interested in buying a home.

Online rental platform Rent.com.au's recent survey of 2000 renters reveals 20 per cent of renters choose to rent, because they are not interested in real estate or they are using their capital, not sunk into a mortgage deposit, to invest elsewhere.

But one of the biggest obstacles is the lack of long-term leases, a stumbling block for people who have kids in school, long-term job commitments or simply want a settled life.

A third of Australian households rent and more than 40 per cent of those have been in the rental market more than 10 years or more, says a recent survey by CHOICE, the National Association of Tenants' Organisations and National Shelter shows.
Jessica Shapiro

CHOICE's recent report, Unsettled: Life in Australia's private rental market indicates "rental rights in Australia lag behind those in many other developed countries, where renters often enjoy secure long-term arrangements with strict limits on rent increases".

The Netherlands, Germany and Denmark offer infinite leases. In the US, Lloyd-Hurwitz says with multi-family rental housing, apartment leases can get up to 5 years.

'No poorer service'

In Australia leases can be as short as six months and renters can be evicted anytime on short notice.

More than a third of Brisbane homeowners rent.
Robert Shakespeare

"It's hard to imagine a product or service this poor in any other sector," CHOICE chief executive Alan Kirkland says.

Previously, suppliers – large institutions such as developers or private capital – were unwilling to enter the market because of weak returns compared to other asset classes such as commercial property.

Lloyd-Hurwitz says "residential yields are 3.5 per cent on a good day" but in reality gross yields – rental revenue before other expenses are deducted – have dipped below 3 per cent in Sydney in the past few months, SQM Research shows. The same has happened in Melbourne.

However, other yields – even in commercial property have fallen – as global wealth chases investment and push prices up.

"The true net yield of an office is about 4 per cent after you take out incentives," Lloyd-Hurwitz says. "So it's 3.5 per cent versus 4 per cent, against 3.5 versus 7 per cent a few years ago."

Treasurer backs longer terms

Treasurer Scott Morrison has already thrown his support behind the long-term rental sector for Australia.

"Progress must be made boosting and diversifying supply of rental stock," he said in a speech to the Australian Housing and Urban Research Institute in Melbourne on Monday.

"However, attention must also be paid to how rented residential real estate can be better structured to provide more opportunities for institutional involvement."

"This would diversify the base of ownership and inoculate risk, while potentially delivering greater stability and certainty as well as greater innovation in product offerings."

Morrison encouraged cashed up superannuation funds to consider providing build-to-rent housing similar to those in the US and Canada.

Last week, new NSW planning minister Anthony Roberts expressed the same sentiment in a speech to the Property Council.

International experience

The biggest build-to-rent market is the US. It generates $US163 billion in revenue a year and has more than 500,000 multi-family related companies in the sector, according to Ibisworld.

Advisory group and build-to-rent experts, Emerge Capital Partners says an exact value of the market is not available but guesstimates total assets held by institutional investors to be around $US600 billion.

The total asset value held by apartment real estate investment trusts – where a lot multi-family apartments are parked – is about $US110 billion, the firm says.

Lloyd-Hurwitz says the US multi-family sector is the largest real estate class, bigger than commercial property and 25 per cent larger than the Australian real estate investment trust sector.

"The valuable income stream with the highest multiples in place on the cash flows come out of that asset class compared to retail or other commercial," she says.

Britain has also fared very well, and in the five years since it started – inspired by the Montague Review of the barriers to institutional investment in private rented homes – has grown rapidly.

Both in the US and Britain, returns range from 4 to 7 per cent. Bigger cities like New York or London, where apartments are more expensive, command yields of just over 4 per cent.

In these mature markets, multi-family apartments are not a cluster of "social dwellings" but high-end modern apartment towers with shared services, property management and often a shared community space.

Pros and Cons

Advisory group, Emerge Capital Partners has been advising many interested investors in this space in Australia and says Australia's first build-to-rent, in the current cycle, is likely to emerge in the next 12 to 24 months.

Interestingly, it was potential settlement risks faced by many apartment builders which has also given the sector a kick-start.

Managing partner Tim Frogley says many developers currently building tall towers for onselling – concerned with settlement issues and the breaching of sunset clauses – are considering converting their towers into build-to-rent apartments.

Emerge says the government does not need to intervene to make the sector work, although tax concessions and faster planning systems will allow the sector to take off faster, the same as any housing industry.

But CLSA's head of real estate Sholto Maconochie says very generous tax concessions and reformed planning laws will be needed for the sector to work.

"We have looked at his but it is not that simple. It requires a combination of state and commonwealth government support and/or legislation changes as currently the yields do not stack up relative to other real estate asset classes," he says.

"Also there is tax asymmetry for retail investors via negative gearing and the 50 per cent capital gains tax concession," unlike institutional investors – so it's not a truly level playing field.

"Another issue is that the multi-family model would need to have land contributed by state or councils at below market value to make the returns stack up. Another option would be for lower council and state infrastructure charges for multi-family, to help increase returns."

Lloyd-Hurwitz says aside from government financial assistance, a change in Division 6C in the Income Tax Act to classify apartments as assets for "operating income" not "capital growth" will be favourable particularly to REITs, an easier planning system and changes in land tax will also encourage more players to the sector.

The players in Australia

Other players are starting to emerge in the sector aside from Mirvac.

Last year, Macquarie Capital, a division of Macquarie Group agreed to a partnership with major US multi-family provider Greystar to provide build-to-rental property in Asia Pacific.

On Thursday, the pair, in a move to accelerate plans, appointed Charles Ma and Chris Key as managing directors to the project.

Cbus Property CEO Adrian Pozzo told a Property Council function this month the company was exploring the sector.

"It won't be through Cbus Property. We are most likely to be the developer in a transaction," he says.

"The returns in multi-family just don't sit within the Cbus Property mandate. We are up the risk return curve. We are in the high teens, we need to be every year for the risk we are taking. Multi-family might return you a 3 to 4 per cent income return if you are lucky."

AustralianSuper's Christine Phillips says the fund also has a multi-family mandate centred on the US and is looking to place "some money" there "probably in the near term".

"It's harder to do multi-family domestically. We find it hard to generate the returns you need," she says. "And we are looking at it in the UK."

The Urban Land Institute says competitive entrants to the market are likely to be offshore institutions which can tap into a lower cost of capital, therefore not pressured by low yields.

But multi-family may already have some green shoots in Australia.

Harry Triguboff's Meriton, which owns just under 7000 long-term rental and serviced apartments across Australia is the closest example of an Australian multi-family market.

US example

Multi-family private group Cofa Capital's Ken Choi, who is from Sydney, was frustrated with the lack of build-to-rent options in Australia. Seven years ago, he moved to Texas and now his firm owns $US500 million in apartments in major cities like Chicago, Houston, Dallas, Phoenix and Atlanta.

Taking advantage of the 2007-2008sub-prime crisis, his firm acquired older style apartments priced as low as between $US50,000 to $US90,000 for a one-bedroom unit with rents between $US700 to $US900 a month. While prices are higher now, they are still much cheaper than Australia.

Net yields are about 7 per cent to 10 per cent after costs.

"I will only come back to buy apartments in Australia if they fall 80 to 90 per cent," he says. "It's just ridiculous how expensive Australia is now."

"And you are looking at red tape in new development, high costs in construction ... in my opinion, it's a very wafty market and it only takes one or two factors for it to fall."

The US is still a far more favourable market not just for the its low cost of construction, but also for better tax depreciation allowances, Choi adds.

More than just affordable housing

"While this is not about affordable housing, it is about taking the pressure off the market," Frogley says.

With more people out of the market, and comfortably renting, price pressures may start to fall.

Renting by choice will grow in the Sydney market says Lloyd-Hurwitz but, "There is no reason why it won't grow in Brisbane or Perth ... because renters want to put their equity into something else and are happy to live in a high tower with good services and tenure."

"There is no guarantee this will happen, but if it is going to happen it is going to be now."